Walker’s Tax Cuts

It’s not true that Gov. Scott Walker’s tax cuts are the cause of Wisconsin’s current budget deficit — a false claim widely spread by MSNBC‘s Rachel Maddow and repeated in numerous e-mails to us since we wrote about the state’s budget problems earlier this week. In fact, the state’s nonpartisan Legislative Fiscal Bureau estimates the tax cuts won’t add a penny to the current year’s $137 million deficit.

Here’s a typical question that we have fielded since our article ran:

Q: How do the $140 billion [sic] in tax breaks that Walker gave out in January 2011 affect the Wisconsin deficit? I was surprised you didn’t mention them. Given that the governor is now demanding sacrifice from public employees but not from corporations, it seems less than fair.

The short answer is that the tax breaks — which total in the millions, not billions — don’t take effect until fiscal year 2012 and beyond, so they do not contribute to this year’s budget deficit, according to Fiscal Bureau Director Bob Lang.

It’s true, however, that they will add $117.2 million to the projected $3.6 billion budget gap in the next two-year budget cycle, which begins July 1, 2011, Lang says. So, the tax cuts make the deficit larger in next budget cycle, but not this one.

The confusion over the impact of Walker’s tax cuts is widespread. TheCap Times, a left-leaning news website in Madison, gave voice to this false claim in a Feb. 16 editorial, and MSNBC’s Maddow echoed many of the site’s points the next day on her TV show.

Cap Times, Feb. 16: To the extent that there is an imbalance — Walker claims there is a $137 million deficit — it is not because of a drop in revenues or increases in the cost of state employee contracts, benefits or pensions. It is because Walker and his allies pushed through $140 million in new spending for special-interest groups in January. If the Legislature were simply to rescind Walker’s new spending schemes — or delay their implementation until they are offset by fresh revenues — the “crisis” would not exist.

Maddow, Feb. 17: There is in fact a $137 million budget shortfall. Republican Gov. Scott Walker, coincidentally, has given away $140 million worth of business tax breaks since he came into office. Hey, wait. That’s about exactly the size of the shortfall.

Our point is not to get into a disagreement with Maddow or anyone else. (Our colleagues at Politifact have had a disagreement with Maddow over Wisconsin budget claims, and you can read about that here.) Our interest is getting at the facts of Walker’s tax cuts.

On his first day in office Jan. 3, Walker called for a special session of the Legislature to deal with job creation. Four bills came from that session that provided tax breaks. On Jan. 31, the fiscal bureau issued a memo that explains the impact of three of those bills on the current fiscal year and the next two-year budget cycle. We will get to the impact in a minute. First, as wrote previously, the fiscal bureau’s memo showed a $121 million gross balance in the state’s general accounting fund for fiscal year 2011 — but that did not include outstanding debts, including more than $170 million for Medicaid services, $21 million for corrections programs and more than $58 million owed to Minnesota for a tax reciprocity deal. The net deficit: $137 million.

Now, what did the fiscal bureau say about Walker’s tax breaks? It said that none of the bills would contribute to this year’s deficit, but that it would add $117.2 million to the two-year budget cycle that begins July 1.

Fiscal bureau, Jan. 31: Our estimates include the impacts of all law changes enacted in prior years and three of the January 2011 Special Session bills: (a) SS SB 2, which federalizes the treatment of health savings accounts; (b) SS AB 3, which would create an income and franchise tax deduction or credit for businesses that relocate to Wisconsin; and (c) SS AB 7, which would create an income and franchise tax deduction for businesses that increase employment in the state. SS SB 2 has been enacted into law as 2011 Act 1. The other two bills have passed both Houses of the Legislature, and the Governor has indicated that he will sign them. It is estimated that, together, these three bills will reduce general fund tax collections by $55.2 million in 2011-12 and $62.0 million in 2012-13.

So, how do Maddow and others come up with the figure of $140 million in tax breaks?

Lang says there is a fourth bill — AB4 and SB4 — that would add $25 million to the Economic Development Tax Credit program, bringing the total cost to about $142 million. But, as Lang and the fiscal notes attached to the bills explain, the Department of Commerce won’t need the extra money until "approximately August 2014" in fiscal year 2015.